What are the 5 key principles of economics?
1. Opportunity costs
2. Marginal principle
3. Principle of voluntary exchange
4. Principle of diminishing returns
5. Real/nominal principle
what you give up to get/ the sacrifice of some amount of one good to get some amount of another good
when you give up something to get something else
How is opportunity cost and scarcity related?
We must trade off one thing for another because resources are limited and can be used in different ways, economics use the concept of opportunity costs because they calculate the value/cost of what is given up to get the next best thing
Production possibilities curve
a curve that shows the possible combinations of products that an economy can produce, given that its productive resources are fully employed and efficiently used.
How does the Production Possibilities curve demonstrate the opportunity cost principle?
If an economy is fully using its resources it can produce more of one product only if it produces less of another product
Thinking at the margin
how does a one-unit change affect the value of another variable and people's decisions
the additional benefit resulting from a small increase (one unit) in some activity
the additional cost resulting from a small increase (one unit) in some activity
The Marginal Principle
increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost
The Principle of Voluntary Exchange
a voluntary exchange between two people makes both people better off
How does voluntary exchange effect markets?
Markets/countries specialize in production of products and exchange goods with other markets/country...one example is international trade
Principle of Diminishing Returns
Suppose output is produced with 2 or more inputs and we increase one input, ceteris paribus (holding the other inputs the fixed). After the point of diminishing returns output will increase at a decreasing rate
The real/nominal principle
What matters to people is the real value of money- what the money can them (purchasing power) NOT the "face" value (nominal)
Real value of money is what money or income buy-- measured in terms of the quantity of the goods the money can buy.
Nominal value of money is the face value of money.